HON’BLE SUPREME COURT · SOURCE-REVIEWED NOTE
Sk. Ar. K. Ar. Somasundram Chettiar and Co., Madurai v. Commissioner of Income Tax, Madras
Civil Appeal Nos. 1109-1110 of 1976
[1992] 1 SCR 49 ·
Indian Income-tax Act, 1922: section 24(1), Explanation 2 and proviso clause (a); section 66(1) · Income-tax Act, 1961: section 43(5) mentioned as corresponding provision
Sources & disclosures includedDownload original judgment / order
2-judge bench · K. Ramaswamy, J. · B. P. Jeevan Reddy, J.
Assessment years: 1960-61, 1961-62
01 · Facts of the case
A cloth-and-yarn merchant claimed losses of Rs. 2,04,746 and Rs. 17,000 in AYs 1960-61 and 1961-62. After purchasing from mills, it agreed to sell to another party and then repurchased the same goods from that party. It ultimately took delivery from the mills and sold to third parties; the intervening contracts were settled by differences. The assessee conceded speculative transactions but claimed the hedging exception. The Tribunal accepted that claim; the High Court answered the reference for Revenue.
Source: SCR pp. 51-54 / PDF pp. 3-6
02 · Discussion by the Hon’ble Court
For a merchant, clause (a) requires the protective contract to guard against price-fluctuation loss on contracts for actual delivery of merchandise sold by that merchant. Those underlying contracts must be sales for actual delivery, not purchases. Exact one-to-one matching is unnecessary, but a correlation between the two sets of contracts is required. A general intention to protect business from future loss is insufficient. The described sale-and-repurchase settlements did not satisfy that relationship. Because speculative character was conceded, the Court expressly left the broader definition issue undecided.
Source: SCR pp. 53-56 / PDF pp. 5-8
03 · Judicial decision
The assessee’s appeals were dismissed, with no order as to costs. The High Court’s adverse answer on the claimed clause (a) exception stood. The judgment does not quantify any eventual set-off against subsequent speculation profits.
Source: SCR pp. 55-56 / PDF pp. 7-8
04 · Outcome / in whose favour
In favour of Revenue on denial of the claimed historical hedging exception for these transactions. The case does not hold that every hedge needs a one-to-one underlying contract, nor decide whether a disputed transaction was speculative where that issue is contested.
05 · AKHB REVIEW POINT
AKHB analysis: preserve contracts, quantity and timing records and delivery evidence showing which underlying sale exposures the protective transactions address. Distinguish lack of exact one-to-one matching from lack of any correlation. The decision concerns a merchant and the 1922 Act; although the judgment notes a corresponding 1961 provision, modern statutory exclusions and later amendments require separate verification. Do not use the conceded premise as an adjudicated rule for every commodity or derivative arrangement.
Source: SCR pp. 53-56 / PDF pp. 5-8
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